It said steady monetary easing at home and abroad, a pick-up in infrastructure spending and stability in crude oil prices will drive growth in the stock market. It also said cyclical sectors such as financials, industrials and energy will lead the growth as opposed to the defensive sectors.

"Action from global central banks has reduced India's tail risks from macro stability tribulations, including high external deficit, and this is now evidenced by declining correlations in the equity market," analysts led by India strategist Ridham Desai said in a note on Tuesday.

While poor domestic liquidity, slowdown in policymaking and higher inflation could go against the growth thesis, broad market earnings growth may have bottomed out and will "accelerate" from here Morgan Stanley said. However, earnings face a risk of falling investment rates and margins may not improve from here, it said.

"Macro conditions could worsen due to high twin deficits. Our proprietary leading indicator for broad market earnings suggests that growth will likely rise to average in the double-digits in the second half 2013 and further to around 20% in 2014," the note added.

While Morgan Stanley assigned a 60% probability to the scenario where Sensex grows by 26%, it said that there are chances that it could also surge 53% to 28,137 on recovery in global growth, strong policy action and interest rate cuts. On the other hand, the benchmark could fall to 17,918 on weak policy action, continuing tight monetary policy and oil price shocks, it added.

On tuesday, the benchmark Sensex fell 0.05%, or 9.68 points, to end at 18329.32 points, falling for the seventh day in the last eight sessions. The broader Nifty ended flat at 5571.55 points. A cautious market ahead of the winter session of Parliament, which starts on Thursday, also tracked lower European shares after a credit rating agency stripped France of its top-notch rating.